The earnings disappointment from Postal Services and Courier segments in 1QFY19 was dragged by fewer business days. Pos is addressing the weak Postal Services segment by exploring workforce integration with Courier segment and seeking for postal tariff hike with the new MCMC. Management is also carrying out corporate courier rate repricing on a gradual basis on the larger customer accounts (e.g. Lazada) to improve Courier margin. The increase in IPC capacity is expected to improve operating efficiency and margin. However, we believe short term earnings will continue to be hampered by margin compression. We maintain our SELL recommendation with an unchanged TP of RM3.03.

Earnings disappointment from a slower quarter. The weak 1QFY19 contribution from the Postal Services and Courier segments were dragged by fewer business days due to the Malaysian General Election and Hari Raya Aidilfitri (total of 8 days).

Addressing the continued downward trend in Postal Services. Management is encouraging integration of workforce between Postal Services and Courier segments e.g. allowing the postal delivery men to also deliver courier items. Management has also approached the new MCMC minister to discuss the postal tariff hike and believes it is justified given the last round hike was in 2010 (the magnitude and timeline of the hike remains uncertain at this juncture). However, we believe the chances of a tariff hike is slim, at least in the near term as the newly elected officials will be cautious of the potential dissatisfaction from the general public.

Corporate courier rates repricing (c.60% of total courier volume). Management highlighted that the upward adjustments of corporate courier rates will be tested on a gradual basis on the larger customer accounts (e.g. Lazada). Currently, the average corporate courier rates vary between 15% to 30% below the standard walk-in rates depending on the size and terms of the contracts. However, we believe Pos does not have strong pricing power, given the existing stiff competition in the industry.

The Integrated Parcel Centre (IPC). IPC 1 expansion (Shah Alam) has recently been completed in July 2018, increasing the sorting capacity to 300k parcels/day (from 120k). The new IPC 2 (near KLIA) is expected to be completed in May 2019 with a capex of RM40m, increasing the overall sorting capacity to 500k parcels/day. The increase in sorting capacity will improve operating efficiency and reduce the need for staff to work overtime and carry out manual sorting (staff cost makes up 55% of total cost of sales).

Near term outlook remain uncertain. Pos will continue to be dragged by its high fixed cost structure, sunset conventional postal services and stiff competition in their courier division against a backdrop of the e-commerce boom. We believe Pos will go through a gestation period from its initiative to improve operational efficiency.

Forecast. Unchanged as earnings have already been cut during the results release.

Maintain SELL, unchanged TP: RM3.03 pegged to a 1.22x PB Multiple which is a 20% discount on SingPost’s FY19 PB Multiple. Short term earnings will continue to be hampered by margin compression.

Source: Hong Leong Investment Bank Research - 28 Aug 2018